Report of the Auditor Generalto the Nova ScotiaHouse of AssemblyFebruary2015

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Independence • Integrity • Impact

Report of the Auditor General to the Nova Scotia

House of Assembly

February

2015

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February 12, 2015

Honourable Kevin Murphy Speaker

House of Assembly Province of Nova Scotia Dear Sir:

I have the honour to submit herewith my Report to the House of Assembly under Section 18(2) of the Auditor General Act, to be laid before the House in accordance with Section 18(4) of the Auditor General Act.

Respectfully submitted

MICHAEL A. PICKUP, CA Auditor General of Nova Scotia

1888 Brunswick Street Suite 302

Halifax, NS B3J 3J8

Telephone: (902) 424-5907 Fax: (902) 424-4350

E-mail: oaginfo@novascotia.ca Website: http://www.oag-ns.ca

: @OAG_NS

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Office of the Auditor General

Our Vision

A relevant, valued and independent audit office serving the public interest as the House of Assembly’s primary source of assurance on government performance.

Our Mission

To make a significant contribution to enhanced accountability and performance in the provincial public sector.

Our Priorities

Conduct and report audits that provide information to the House of Assembly to assist it in holding government accountable.

Focus our audit efforts on areas of higher risk that impact on the lives of Nova Scotians.

Contribute to a better performing public service with practical recommendations for significant improvements.

Encourage continual improvement in financial reporting by government.

Promote excellence and a professional and supportive workplace at the Office of the Auditor General.

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Who We Are and What We Do

The Auditor General is an independent nonpartisan officer of the Legislature, appointed by the House of Assembly for a ten-year term. He or she is responsible to the House for providing independent and objective assessments of the operations of government, the use of public funds, and the integrity of financial reports. The Auditor General helps the House to hold the government to account for its use and stewardship of public funds.

The Auditor General Act establishes the Auditor General’s mandate, responsibilities and powers. The Act provides his or her Office with a modern performance audit mandate to examine entities, processes and programs for economy, efficiency and effectiveness and for appropriate use of public funds. It also clarifies which entities are subject to audit by the Office.

The Act stipulates that the Auditor General shall provide an opinion on government’s annual consolidated financial statements; provide an opinion on the revenue estimates in the government’s annual budget address; and report to the House at least annually on the results of the Office’s work under the Act.

The Act provides the Office a mandate to audit all parts of the provincial public sector, including government departments and all agencies, boards, commissions or other bodies responsible to the crown, such as regional school boards and district health authorities, as well as funding recipients external to the provincial public sector. It provides the Auditor General with the authority to require the provision of any documents needed in the performance of his or her duties.

In its work, the Office of the Auditor General is guided by, and complies with, the professional standards established by the Chartered Professional Accountants of Canada, otherwise known as generally accepted auditing standards. We also seek guidance from other professional bodies and audit-related best practices in other jurisdictions.

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1 Message from the Auditor General

Introduction

I am pleased to present my February 2015 Report to the House of Assembly. This 1.1 Report focuses on financial reporting issues and includes work completed by my

Office during 2014.

I wish to acknowledge the valuable efforts of my staff whose dedication and 1.2 professionalism make this work possible. As well, I wish to acknowledge the cooperation and courtesy we received from staff in departments and agencies during the course of our work. Overall, we found that they answered our audit queries promptly and satisfactorily. Without their assistance, it would be difficult to complete our work on a timely basis.

Key senior personnel involved in these audits were:

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Ann McDonald, CA – Assistant Auditor General Shelley Creighton, CA – Audit Principal

Dana Jasper, CA – Audit Principal

Overview of Report

The Office of the Auditor General has a number of legislated responsibilities 1.4 related to the financial management of government. These include:

•

a review engagement report, including an opinion, on the reasonableness of government’s revenue estimates in its annual budget;

•

a report, including an opinion, on the fair presentation of government’s annual consolidated financial statements;

•

an audit of the financial statements of four provincial agencies;

•

an audit of controls and compliance with respect to the House of Assembly Management Commission Act; and

•

reviews of the audit opinions and management letters provided by external auditors on agencies included in the government reporting entity.

In addition, we may also conduct other financial audits in government 1.5 as we consider appropriate. As a result of our work, we generally provide recommendations in all audits and reviews to improve financial management

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Report of the Auditor General • • • February 2015 Message from the Auditor General

in government. We also provide information on financial matters we consider significant enough to bring to the attention of Members of the House of Assembly.

On April 1, 2015, the new Provincial Health Authority will be created with its first 1.6 financial statement year-end being March 31, 2016. The results of this new entity will be the single most significant expense of the government, accounting for about 20% of annual expenditures. We are working cooperatively with government to arrange the details of our role as independent auditor of the annual financial statements. We look forward to working with the board and management of the new authority as we take on this important role.

This report contains six chapters in addition to this introduction.

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Chapter 2 provides information on retirement and employment benefits, the 1.8 most significant of which are post-retirement benefits such as health benefits and retirement allowances, and compensated absences such as sick leave. The liability for these benefits was $1.8 billion at March 31, 2014. The purpose of the chapter is to provide objective information on these long-term obligations, including details such as the amount, extent and contribution rates for each benefit. The chapter is for information purposes only and does not include any recommendations or conclusions related to the ongoing sustainability or merit of the benefits.

Chapter 3 is our annual information on indicators of government financial 1.9 condition. We reported ten indicators related to the sustainability, flexibility and vulnerability of Nova Scotia’s financial condition, and provided information on budget-to-actual and actual-to-actual variances for the year ended March 31, 2014. Several of these indicators show that the province is in poor financial shape. For example, net debt per capita has increased to $15,659 – the highest it has ever been. In addition, the province incurred a deficit of $679 million last year compared with $304 million in 2012-13.

We audited accountability reporting of 11 government agencies and reported the 1.10

results in chapter 4. We concluded the following.

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Annapolis Valley Health and the IWK Health Centre followed guidance provided by the Department of Health and Wellness for preparation of their annual business plans, but these plans provided little information to assess what each entity wanted to achieve during the upcoming year.

We acknowledged IWK’s public reporting on several key performance indicators but suggested achievable targets need to be developed for each indicator.

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We concluded that accountability reports by two regional school boards required additional student-focused outcomes.

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Outcomes included in the remaining seven entities we tested did not follow

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Message from the Auditor General

best practices as many were not specific or measurable. However, several of these outcomes, with small changes, would provide clearer information as to whether an entity was achieving its mandate.

Chapter 5 provides the results of our financial audits and reviews. The opinion on 1.11

the 2014-15 revenue estimates was unqualified, as was the opinion on the province’s March 31, 2014 consolidated financial statements. We made recommendations for improvements to financial management processes as the result of both engagements, including improved internal controls. We also commented on our audits of four government agencies, and controls and compliance of member transactions with the House of Assembly Management Commission Act.

In our review of agency audit opinions and management letters, we reported 1.12

that all school boards received an unqualified audit opinion for the year ended March 31, 2014. However, we continue to be concerned with the number of recommendations which remain outstanding from year to year in some entities, including health authorities and Housing Nova Scotia. These deficiencies need to be addressed by management and boards of these entities on a timely basis.

The implementation rate of recommendations reported in our January 2012 1.13

Report of the Auditor General is 70%. This is a decline of 7% from the 77%

implementation rate reported last year. This reduction is disappointing as our recommendations were agreed to and we believe provide valuable input to government. In addition, we disagree with the implementation status of two recommendations. Government was unable to provide adequate support for us to establish that each of these had been fully implemented.

Departmental responses to recommendations have been included in the appropriate 1.14

chapter. We will follow up on the implementation status of our recommendations in two years, with the expectation that significant progress will have been made.

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At a Glance

Page

Summary 12

Background

Employee retirement benefits and compensated absences

have created a significant financial obligation 13

Chapter Objective 13

Significant Observations 15

Unfunded Employee Retirement Benefits and Compensated Absences

The $1.8 billion liability is unfunded and will be paid for through

future taxes and other revenues 16

These benefit costs carry risks to the future finances of Nova

Scotia 16

Retirement Health Benefits

Retirees’ health benefits obligation totals $1.1 billion 19 Nova Scotia Teachers’ Pension Plan retirees pay 0% of health

care premiums; other public sector retirees pay a portion of

premiums 19

Retiring Allowances

The province’s liability for retiring allowances (long service

awards) was $373 million at March 31, 2014 21

Retiring allowances are fully paid by the province 21 Sick Leave

Unused sick days accrued in the health and education sectors

have resulted in a $202 million liability 24

Appendix A 26

Information on Unfunded Employee Retirement Benefits and Compensated Absences

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Report of the Auditor General • • • February 2015

Summary

Employee retirement benefits and compensated absences have existed for many years and have accumulated over time. These benefits and compensated absences represent a significant liability and pose major risks to Nova Scotia; the sustainability of these plans should be assessed on an ongoing basis.

As at March 31, 2014, the liability related to these plans totaled approximately $1.8 billion. These obligations are unfunded, meaning money has not been set aside by the province to pay for benefits. Payments made under these plans will have to be paid through future taxes and other revenues.

The obligation is subject to risks, including borrowing rates and rising health care costs. These risks impact the future finances of Nova Scotia as assumption changes can have a significant impact on the obligations and annual costs associated with these plans.

The liability for retirees’ health benefits is the most significant component of the employee retirement benefits obligation. It represents $1.1 billion of the total $1.8 billion obligation. There are variances in the benefits across public service sectors. For example, the province pays 100% of retirement health benefit premiums for retired teachers but pays a portion of premiums for retired civil servants.

Retiring allowances accrued for both union and non-union management and staff in the public sector totaled $373 million and are fully paid by the province. Long-term workers could receive a significant one-time payment of as much as one half-year of pay upon retirement, in addition to their pension entitlements. There are differences in retiring allowances provided to retirees in the public service sector, health sector and education sector.

There is also a liability for earned, but unused, sick time in the health and education sectors, although the amount of unused sick time that may be carried over varies by sector.

This obligation totaled $202 million at March 31, 2014. Although there is no cash payment associated with use of accumulated sick time, and unused amounts expire on retirement, there is still an obligation for these amounts that must be recognized while the individual is employed with the province.

Our intent with this chapter is to provide information to Nova Scotians on the details of benefits received by employees, how benefits are earned, and the risks and costs associated with providing these obligations.

2 Information on Unfunded

Employee Retirement Benefits and

Compensated Absences

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Background

Employee retirement benefits and compensated absences have created a significant financial obligation

Government sponsors several employee benefit plans including a number which 2.1 provide retirement benefits and compensated absences. Retirement benefits include retirement health benefits and retiring allowances. Compensated absences include accumulated sick leave, workers’ compensation and long-term disability.

These arrangements have arisen from various past agreements and decisions and have created a significant financial obligation to Nova Scotia.

The province’s obligation for these plans totaled $1.8 billion at March 31, 2014.

2.2 While appropriately accounted for, no funds have been set aside to pay these amounts, with the exception of long-term disability, which is paid from the province’s fully-funded, long-term disability trust fund.

These plans represent almost 69% of the total obligation owed for all employee 2.3 retirement benefits, including pensions. Contributions, interest costs, and the impact of changes in other assumptions related to these benefits were $156 million in 2013-14, about 24% of the total expense for all pension, retirement and other obligations. Employer contributions made by the province to other employee retirement benefits, and compensated absences, either directly or through health authorities and school boards, totaled $66 million for the year ended March 31, 2014.

Our Office conducts the annual audit of the province’s consolidated financial 2.4 statements. We are satisfied the obligation for these benefit plans is fairly presented

in accordance with Canadian accounting standards for the public sector.

Most Canadian jurisdictions offer one or more of these benefits to their public 2.5 sector employees. A summary of plans offered throughout the country, including

by the federal government, is included in Appendix A.

Chapter Objective

We do not question the merit of having these programs, or the decisions made 2.6 by past governments to put these benefits in place. These decisions and actions

2 Information on Unfunded

Employee Retirement Benefits and

Compensated Absences

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on the ongoing impacts of such decisions, including the risks associated with the resulting obligations. This chapter is for information purposes only and is not as the result of an audit. We met with senior government staff to obtain information on government’s short-term and long-term plans for these obligations, including information on whether government has considered their sustainability.

In this chapter, we provide detailed information on certain unfunded employee 2.7 retirement benefits and compensated absences. These plans represent a significant liability to the province. As these plans are unfunded, there are risks associated with financing these plans, mainly due to the variability in their underlying assumptions. In addition, the annual cost of these plans, either through contributions, as interest costs resulting from these obligations, or as the valuation adjustment to recognize the impact of changes in assumptions, is significant and poses a risk both to their sustainability, and to the province’s annual operating results.

The following table includes summary information on the province’s employee 2.8 benefit plans, including current year service costs related to each plan (that is, the cost accruing to the government for employees’ service in the last fiscal year) and the interest charges in carrying these liabilities.

Post-Employment Benefits Compensated

Absences Total

(in thousands) Retirement Health Benefits

Retiring

Allowance Employee Retirement

Incentive Plans (1)

Other Employee

Future Benefit Plans

Sick Leave

Plans Other (2)

Liability, March 31, 2014

$1,094,319 $373,319 $133,349 $4,667 $202,319 $46,811 $1,854,784

Employer contributions

$19,907 $15,001 $2,221 $134 $15,149 $13,184 $65,596

Interest charges

$42,234 $16,055 $5,722 $164 $8,001 $680 $72,856

Pension valuation adjustment*

$14,917 $18,562 $3,418 $26 $6,475 $288 $43,686

Total Expense $77,058 $49,618 $11,361 $324 $29,625 $14,152 $182,138

*Pension Valuation Adjustment is an adjustment due to changes to pension valuation not attributed to employer contributions or debt service costs. These generally consist of amortization of net actuarial adjustments and current service cost adjustments.

(1) Retirement incentive plans were offered to certain employees to bridge them to retirement. The last plan offered was in 1994.

(2) Other compensated absences consists of Long-Term Disability and Worker’s Compensation.

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Significant Observations

Unfunded Employee Retirement Benefits and Compensated Absences Introduction

2.9 – The most significant obligations associated with employee retirement benefits and compensated absences are unfunded plans such as:

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retirement health benefits ($1.1 billion);

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retiring allowances ($373 million); and

•

accumulated sick leave ($202 million).

Other plans totaled about $125 million at March 31, 2014, making the total liability 2.10

$1.8 billion.

It is important to note that, while the liability associated with allowing certain 2.11

employees to accumulate unused sick days has been recognized, there is no payment (cash flow) when these days are used. The liability reduces by the amount of accumulated days used each year. Unused days are forfeited when employment ends.

Benefits are provided to union and non-union management and staff in the 2.12

province’s public sector for future health costs, service awards and other benefits.

The liability represents the present value of future payments to be made over a future period of time, or at a single point in time in the future, under each of these arrangements. Several of these benefits are included in various collective agreements. These benefits are also provided to certain excluded and non- bargaining unit employees, including management and staff in government departments and agencies, health authorities and school boards.

Amounts have increased substantially over the past five years, particularly the 2.13

obligation for retirement health benefits which has increased by almost 43%.

Retiring allowances have increased almost 20% in the same period. Accumulated sick leave has only been recognized as an obligation since 2012-13; it has increased approximately 7% during this two-year period.

($ in millions) 2009-10 2010-11 2011-12 2012-13 2013-14

Retirement Health Benefits $766 $928 $975 $1,040 $1,094

Retiring Allowances $312 $323 $333 $360 $373

Accumulated Sick Leave N/A N/A N/A $188 $202

Estimated costs to the province when an employee retires

2.14 – For information

purposes only, we have provided an example of what an employee would receive in the initial year of retirement from the public service, using the following assumptions.

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$75,000 salary at the time of retirement

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Worked in their respective sector for 30 years

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Not deferring their pension

•

Retiring at age 55

•

Estimated health benefit premiums of $1,800

Amount Received on Retirement Public Sector

Retiring Allowance – one-time payment $37,500

Pension – annual $42,422

Retirement Health Benefits $1,170

The $1.8 billion liability is unfunded and will be paid through future taxes and other revenues

Unfunded plans

2.15 – With the exception of obligations for long-term disability recognized in the province’s Long-Term Disability Plan Trust Fund, none of the plans discussed in this chapter are funded. This means no money has been set aside by the province to pay for these obligations as they become due. Each year, the net cost of offering these plans is included in operations and contributes to the annual surplus or deficit of the province. Payments made through these plans will have to be funded through taxes and other revenues. An increase in the liability also contributes to the province’s total net debt position.

Risks to unfunded plans

2.16 – As these plans are unfunded, investment risks such

as credit risk and liquidity risk are not applicable. The most significant risks impacting these plans are borrowing rates and changes in assumptions.

These benefit costs carry risks to the future finances of Nova Scotia

The liability for each of these plans is determined by an actuary using 2.17

assumptions approved by government, although actuarial practice is to assess these assumptions as reasonable. Significant assumptions include mortality, salary increases, and inflation rates. Changes to any of these assumptions can have an impact on the province’s future liability, and on the current year’s expense.

Although the province’s actuaries have not calculated the impact of changes to each assumption, there is information in the annual valuation reports on two assumptions – the discount rate, which is applicable to all these obligations, and the health care escalation factor, which is applicable to retirement health care benefits only (discussed later in the chapter).

Discount rates

2.18 – The obligation for employee retirement benefits represents the current estimated costs today to provide these benefits at a date in the future, or as is the case for retirement health benefits, a series of payments over a period of time. As with any liability, there is a cost associated with carrying this debt over

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time. To determine the cost today associated with what employees have earned but will only be provided in the future, a discount rate is used. The discount rate is based on the province’s cost of borrowing. This is because payments made on behalf of these plans are made through the province’s daily operations, and these operations determine borrowing requirements. The annual cost of owing these benefits is included in the province’s debt servicing costs. Small changes to the discount rate used to estimate the current obligation affect the debt servicing costs.

The province’s actuaries have not provided a sensitivity analysis on changes to 2.19

the cost of borrowing (the discount rate). However, the valuations for each of these plans for the year ended March 31, 2014 included the impact on the April 1, 2013 balances due to a change in the cost of borrowing from 4.3% to 4.1%.

The following table notes the impact of the reduced cost of borrowing on retiring allowances, retirement health benefits and accumulated sick leave.

Experience Gain or Loss Due to Changes in Discount Rate on General Revenue Fund (in thousands)

2013-14

Retirement Health Benefits $35,610

Retiring Allowances $4,291

Accumulated Sick Leave $2,802

Total $42,703

Planning

2.20 – We met with senior staff at the Department of Finance and Treasury Board and the Public Service Commission to discuss short-term and long-term planning for these benefits.

Annual plans

2.21 – The Department obtains annual actuarial valuations for all pension, retirement benefits, and compensated absences. These valuations provide current service costs and other annual costs for each plan, as well as the year-end liability. The results are included in the province’s annual consolidated financial statements. The Department of Finance and Treasury Board provides school boards and health authorities with information on their respective share of these costs because each of these entities must prepare annual financial statements separate from those of the government and must include these costs in their results.

Valuations also include cost estimates for the upcoming fiscal year. On a 2.22

government-wide basis, the impact of these costs on the province’s surplus or deficit, as well as on total net debt, is estimated for preparation of the annual budget. In addition, while the annual planning process for retirement health benefits includes the results and estimates from these valuations, each of the public service, health and education sectors also has a benefits committee which reviews the annual costs provided by the respective external benefit provider.

The committees determine whether rate or benefit changes are needed. Staff

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Long-term planning

2.23 – Provision for retirement and sick leave benefits, are included in various public sector union agreements. Some retirement benefits are provided outside of union agreements for excluded or non-bargaining unit employees. These benefits apply to individuals who receive pension benefits from the Public Service Superannuation Plan. Provision for these benefits is provided by the Public Service Commission, subject to the approval of the Governor-in- Council, as noted in the Civil Service Act, section 7 and in the General Civil Service Regulations. Accordingly, any changes to the majority of these benefits would usually be achieved through cabinet approval. Changes to certain benefits covered in union agreements are often extended to non-bargaining employees if these employees receive a similar benefit. Benefits extended to the Canadian Union of Public Employees (CUPE) and similar to those provided to civil servants, are provided through a past Order-in-Council, not through the Civil Service Act.

Sustainability

2.24 – Senior staff at the Department of Finance and Treasury Board informed us that government has recently begun a review of the long-term sustainability of certain benefits.

The long-term sustainability of these benefits is a critical component in 2.25

government’s efforts to balance the budget and in overall program planning. The sensitivity analysis provided by the province’s actuaries on health care escalation, as noted below, and our summary of changes to the liability for these plans due to a change in the cost of borrowing between 2013 and 2014, indicates assumption changes can have a significant impact on the province’s financial position.

We believe responsibility should be assigned for assessing the ongoing 2.26

sustainability of these plans. Government needs to evaluate how these benefits will be addressed on an ongoing basis and develop a plan to mitigate the associated risks. For example, government may consider funding these plans – setting aside assets – so that risks associated with borrowing rates may be offset by changes in asset values. Any changes should come from a comprehensive analysis based on overall compensation packages.

Sector composition

2.27 – Three sectors comprise the most significant portion of retirement benefit obligations: public service (union and non-union civil servants and CUPE highway workers), health and education. These sectors represent 88% of the total accrued benefit liability for non-pension benefits and compensated absences (86% of the net benefit plan expense for 2013-14).

Eligibility, contributions and benefits vary by sector and, within each sector, by union agreement or employment terms and conditions.

The following paragraphs provide detailed information of each for these plans, by 2.28

sector, including growth over the past five years.

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Retirement Health Benefits

Retirees’ health benefits obligation totals $1.1 billion

Retirement health benefits have an accrued benefit obligation of $1.1 billion, 2.29

or 59% of all other employee retirement benefit obligations, representing the most significant component of all post-employment benefits. In 2013-14, debt servicing costs associated with retirement health benefits were $42 million or almost 58% of total non-pension debt servicing costs. The total annual cost, including employer contributions, related to retirement health benefits for 2013- 14 for the public service, health and education sectors was $77 million. This

obligation has increased by almost 44% over 5 years.

Nova Scotia Teachers’ Pension Plan retirees pay 0% of health care premiums;

other public sector retirees pay a portion of premiums

As can be seen from the table above, the majority of the obligation at March 31, 2.30

2014 relates to those in the education sector. Although there are variations in the number of active and retired members in the various sectors, as seen in the table below, the amount owing per member is almost double for the education sector in relation to the public sector, and 2.5 times that of those in the health sector. The significant difference in the obligation related to the education sector is presumed to be because annual premiums are funded 100% by the province, as compared to the province funding a portion of premiums in the other sectors.

2013-14 Retirement

Health Obligation Number of Members

Used in Valuation Estimated Retirement Health Benefit Obligation

per Member 2013-14

Public Sector $276 million 25,731 $10,726

Health Sector $166 million 20,164 $8,232

100 200 300 400 500 600 700

2009-10

$766 million 2010-11

$928 million 2011-12

$975 million 2012-13

$1 billion 2013-14

$1.1 billion

Public Service Education Health Other

$ millions

Retirement Health Benefits Obligation by Sector

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There are two components of health benefits provided to retired public sector 2.31

employees: the annual premium paid to an external service provider to deliver these benefits, and the total liability to the province for future costs related to these amounts. The annual cost to the province varies by the collective agreement governing the various members, or by the Civil Service Act or Order- in-Council in the case of the public service (including CUPE). The province’s share of annual premiums for retired employees receiving benefits is identified in the table below.

Sector Authority Who Pays Premiums Administrator

Public Service Civil Service Act

Order-in-council 65% funded by the province and 35%

funded by the retiree

Public Service Commission

Health CAW/CUPE Province pays fixed

amount of $1,055 for single coverage,

$2,144 for couple coverage and $2,713 for family coverage – any excess of

premium is paid by the retiree.

Health Association Nova Scotia and some district health authorities

NSGEU/NSNU 65% funded by the province and 35%

funded by the retiree Non-union

Employment Terms and Conditions

The premium paid by the province varies between fixed rate coverage and 65% depending on personnel type Education Nova Scotia Teachers

Union Agreement 100% funded by the

province Johnson Insurance Inc.

Health care escalation factor

2.32 – The obligation related to retirement health benefits is estimated using several assumptions, including mortality rates and health care inflation assumptions. As people live longer and health care costs rise, so do the costs associated with providing retirement health benefits in the future, and in turn the related obligation.

In their valuation reports, actuaries indicate that different assumptions or 2.33

scenarios could result in very different conclusions. Actuaries generally do not provide sensitivity analyses. However, the actuaries’ reports on retirement health benefits at March 31, 2014 included a sensitivity analysis related to the rising costs of health care. These costs impact the escalation factor (or inflation factor) used in determining the liability for retirement health benefits. The reports include a high-level sensitivity analysis demonstrating the impact of a 1% increase in the escalation factor. This would result in an increase to the province’s obligation of approximately $224 million, as shown in the table below.

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Effect of 1% Increase in Health Care Cost Trend on Obligation of the Province (in thousands)

2013-14

Public Sector $49,769

Health Sector 26,953

Education Sector 147,356

Total $224,078

Retiring Allowances

The province’s liability for retiring allowances (long service awards) was $373 million at March 31, 2014

The second biggest component of retirement benefits is the province’s retiring 2.34

allowance obligation which totaled $373 million, or approximately 20% of employee retirement benefit and compensated absences obligations at March 31, 2014. Debt servicing costs related to retiring allowances were $16 million in 2013-14, or 22% of total other employee retirement benefit and compensated absences debt servicing costs. The table above provides a five-year history of the liability for these allowances, by sector. The total liability has increased from

$312 million to $373 million in that period, with 52% or $32 million, related to increases to retiring allowances in the health sector. This obligation has increased almost 20% over five years.

Retiring allowances are fully paid by the province

Retiring allowances, or long service awards, provide a lump sum payment to an 2.35

employee on retirement, and are in addition to pension benefits. These awards are fully paid by the province. Retirement allowances form part of an overall compensation package.

20 40 60 80 100 120 140 160 180

2009-10

$312 million 2010-11

$323 million 2011-12

$333 million 2012-13

$360 million 2013-14

$373 million

Public Education Health Other

$ millions

Retiring Allowance Obligations by Sector

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Each of the public service, health and education sectors offers various retiring 2.36

allowances. Benefits accrue during an employee’s career, and the amount received on retirement varies slightly by sector. However, all are the same in that a retiring allowance can only be obtained once an employee retires under applicable pension rules and upon immediate acceptance of their pension. Retiring allowances can result in an employee receiving a one-time lump sum payment amounting to as much as 50% of his or her annual salary.

The following table details various retiring allowance provisions by sector and 2.37

enabling authority, and notes each benefit’s administrator.

Sector Authority Benefit Administrator

Public Service* Civil Service Master Agreement CUPE Highway Workers Collective Agreement Crown Attorneys’ Agreement General Civil Service Regulations

One week’s pay for each year of full-time service to a maximum of 26 weeks of benefits

Department of Finance and Treasury Board

Health Various collective agreements One week’s pay for each year of full-time service to a maximum of 26 weeks of benefits

District health authorities

Education Various collective agreements

Teachers (hired after July 31, 2002)

1% of annual salary at retirement multiplied by years of service, to a maximum of 30 years

Regional school boards and Nova Scotia Community College

Teachers (hired before August 1, 2002)

Benefits determined by provisions of the collective agreement with the applicable school board

* Includes a small number of Health and Education sector employees grandfathered into the plan.

Transition allowances to deceased or former Members of the Legislative 2.38

Assembly – A transition allowance is payable to any member who dies while being a member, does not re-offer, resigns, or who is defeated. The allowance is payable in equal amounts over twelve months, or as a lump sum payment. These allowances are not included in the employee retirement benefit obligation and are outside of any pensions members may receive.

Regulations to the House of Assembly Act note that the entitled member 2.39

“shall be paid a transition allowance equal to the product of:

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a) one twelfth of the person’s number of months of service as a member of the House; and

b) one twelfth of the annual indemnity and allowance for a member at the rate in force immediately before the person ceased to be a member,

c) but in any case not less than twenty-five per cent or greater than one hundred per cent of the annual indemnity and allowance referred to in clause (b).”

The impact of these regulations can best be shown through the following 2.40

examples.

•

Example 1: A Member making $89,235 and with 15 years of service would get $111,544 (180 months x 1/12) x (1/12 x $89,235). However, a Member is not entitled to more than the annual indemnity of $89,235.

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Example 2: A Member making $89,235 and with 4.5 years of service would receive $33,463 (54 months x 1/12) x (1/12 x $89,235).

For the year ended March 31, 2014, transition allowances of $1,657,818 were paid 2.41

to 29 MLAs, an average of $57,166. These transition allowances are not accrued as liabilities.

Sick Leave

20 40 60 80 100 120 140 160

2012-13

$188 million 2013-14

$202 million

Education Health

$ millions

Accumulated Sick Leave Benefit Obligations by Sector

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24

Unused sick days accrued in the health and education sectors have resulted in a $202 million liability

Certain employees in the health and education sectors are able to accumulate 2.42

unused annual sick leave days in an accumulated bank to a specified maximum number of days to be used in the future. Accumulated days are not paid out at any time and cannot be cashed out upon retirement. There is no cash payment if banked days are used during a year, except to the extent an organization, for example a hospital or school, pays to back-fill a position. However, accumulated sick days result in a financial obligation for Nova Scotia.

The accumulated benefit obligation related to unused sick days in the health and 2.43

education sectors is $202 million, or almost 11% of all other employee retirement benefit and compensated absences obligations. Annual debt servicing costs related to accumulated non-vesting sick leave benefits are $8 million or almost 11% of total other employee benefit and compensated absences debt servicing costs. The obligation, which was recognized for the first time at March 31, 2012, for employees in both the health and education sectors has increased by 7% or

$14 million in the past two years.

The following table provides details of eligibility and benefits by sector.

2.44

Sector Authority Benefit Administrator

Public Service N/A – no non-vesting

sick leave N/A – no non-vesting

sick leave N/A – no non-vesting sick leave

Health Various collective

agreements There are variations from union to union and DHA to DHA. The main benefit is as follows.

• Full time employees accrue 1.5 sick days for every month, or 18 days per year

• Employees may accrue up to 150 days total Unused sick leave at termination or retirement is lost

District health authorities

Education Various collective

agreements There are slight differences for each school board. The main benefit is as follows.

• Full time teachers are entitled to 20 sick days per school year

• Teachers may accumulate a maximum of 195 days total

Regional school boards

Unused sick leave at termination or retirement is forfeited.

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Individuals in the public service are entitled to 18 sick days each year; unused days 2.45

do not accumulate. In the event of illness extending beyond 3 days, employees automatically transfer to short-term illness benefits. These total 100 days per occurrence and the salary reduces to 75% after the 40th day for employees with one or more years of service. Accumulated sick leave banks provide a greater benefit after the 40th day of illness because there is no reduction in salary. Both short-term illness and accumulated sick leave banks can bridge an employee to long-term disability provisions if needed.

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Appendix A

Additional Information

Comparison to other jurisdictions – Most provinces and the Federal government offer retirement benefits in addition to pensions. The following table provides an overview of non-pension benefits by Canadian jurisdiction.

Jurisdiction Retirement

Allowances Retirement Health

Benefits Accumulated Sick Leave

Newfoundland and Labrador

Prince Edward Island x

Nova Scotia

New Brunswick x x

Quebec x

Ontario

Manitoba x

Saskatchewan

Alberta ¹ x x x

British Columbia

Nunavut Yes under federal government Yes, but not booked as amount is insignificant

North West Territories Yes under federal government Yes, but not booked as amount is insignificant

Yukon Canada

1 There may be some small entities and groups that are entitled to these benefits; however, they are not material to the Public Accounts.

Recent changes in some jurisdictions’ public sector pension plans and the increasing burden plans place on government finances have prompted audits by legislative audit offices. Both the Office of the Auditor General of Canada and the Auditor General of Alberta have recently completed audits on the sustainability of plans in their respective jurisdictions.

For information purposes only, the following paragraphs provide information on recent benefit changes in other Canadian jurisdictions.

Retirement health benefits – These benefits were recently under review by the federal government. The 2014-15 federal budget included results of recent cost-sharing changes to these benefits. These changes doubled the amount retired federal civil servants will pay (transitioning the cost-sharing ratio from 75% government/25% retiree contributions to 50%/50%).

Retiring allowances – In recent years, two Canadian jurisdictions have made changes to retiring allowances.

In 2011, certain federal civil servants who are members of the Public Service Alliance of Canada were given the option to accept payout of accumulated benefits, keep the

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pay until retirement, or a combination of both. However, benefits will no longer be earned under a new collective agreement and arrangements with other employees. The estimated annual savings to the federal government is $500 million per year.

In New Brunswick, retiring allowances were discontinued for new entrants to the non- bargaining group of employees as of April 1, 2013. Retiring allowance benefits ceased to accumulate at March 31, 2013 for management and non-union employees.

Accumulated sick leave – The federal government is currently attempting to negotiate changes to existing benefits with one of its largest unions, the Public Service Alliance of Canada. The government proposes to reduce annual sick leave to 5 days per year and introduce an unpaid seven-day waiting period before employees qualify for a new short-term illness program. The proposal also involves eliminating the accumulated sick leave bank which is estimated to be a $1.5 billion obligation.

Sick leave banks were recently removed from Ontario teachers’ contracts and have been identified as an issue in municipal government operations as well.

It is evident that unfunded employee retirement benefits and compensated absences are a significant public sector issue across jurisdictions.

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At a Glance

Page

Summary 30

Introduction 31

Overall Financial Condition

Indicators show that Nova Scotia is in poor financial shape 32

Financial Performance 2013-14

Budget-to-actual deficit variance of $695 million 32 Tax revenue was under budget by $313 million 33

$318 million write-off of deferred losses of the Public Service

Superannuation Plan increased the deficit 34

Financial Indicators Sustainability

Net debt increased by $2 billion or 16% since 2011 35 Government of Nova Scotia debt increased almost 6% to

$15,659 per Nova Scotian 36

Amount of net debt as a percentage of total revenues

increased by 9% in 2014 37

Sustainability Indicators Related to GDP

Provincial net debt is placing an increasing burden on the

economy 39

Flexibility

Nova Scotia’s debt servicing costs-to-revenues is higher than

four of the five compared jurisdictions 40

Vulnerability

Federal government transfers have remained stable over the past five years at approximately $3 billion per year (34% of

total revenues) 41

Indicators of Financial Condition

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30

Summary

The purpose of this chapter is to provide further information on the province’s financial health by reporting on certain accepted indicators of financial condition. Although the province’s consolidated financial statements provide a fair snapshot of its financial position at its fiscal year end (March 31) and the results of its operations for that year, they do not provide a complete indication of the province’s health nor how well it is performing in relation to its economic and fiscal environment. The indicators reported in this chapter are meant to provide additional information on the province’s financial condition, but are not intended to comment on the impact of government policies on financial results.

Ten key indicators show that Nova Scotia is in poor financial condition. There was a serious decline in the financial position of the province from the prior year, particularly with respect to budget to actual operating results. Budget to actual results is a measure of financial performance and shows the extent to which government adhered to its fiscal plan as detailed in its budget. The province’s deficit of $679 million for the year ended March 31, 2014 was a $695 million variance from the $16 million surplus included in the 2013-14 budget. Of this variance, $318 million was attributed to changes in the governance structure of the Public Service Superannuation Plan which resulted in the removal of the liability for the Plan from the province’s consolidated financial statements. This necessitated the one- time recognition of previously deferred Plan losses. The variance can also be explained by a $313 million downward revision in estimated tax revenue.

Net debt continues to increase. Since 2011, net debt has increased by $2 billion, or 16%. Net debt per capita also increased by 6% to $15,659 per capita, the largest annual increase in the past five years. Further, there was a significant increase during the year in the percentage of net debt to total revenue, going from 138% in 2013 to 147% in 2014, a concerning increase of 9%. Finally, because provincial net debt is at 38% of the province’s GDP, it is placing an increasing burden on the economy. These sustainability indicators demonstrate that there are real risks to future programs and services provided to Nova Scotians.

Although debt servicing costs as a percentage of total revenue have remained fairly constant over the past five years, Nova Scotia’s debt servicing costs – to – revenues compares unfavourably to four of the five jurisdictions we selected for comparison purposes. The level of debt servicing costs is an indicator of government’s limited flexibility in improving programs and services because of the annual impact of outstanding debt.

Finally, federal government transfers as a percentage of total provincial revenues have stayed constant over the past five years. Although stable, this demonstrates that Nova Scotia is vulnerable to changes in federal policies which may change the amount and timing of these transfers.

3 Indicators of Financial Condition

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Introduction

One factor in assessing the financial condition of the government is the province’s 3.1 consolidated financial statements. The statements provide a snapshot of the province’s financial position at its fiscal year end (March 31) and the results of its operations, and changes in both cash flow and net debt for the preceding fiscal year.

However, they do not provide a complete indication of the province’s health nor how well it is performing in relation to its economic and fiscal environment. Although there is information on the economy, including several indicators, in Volume 1 of the Public Accounts, there is no comparison with other jurisdictions.

The purpose of this chapter is to provide further information on the province’s 3.2 health through reporting on certain indicators of financial condition. These indicators are among those recommended for reporting by the Public Sector Accounting Board’s Statement of Recommended Practice 4: Indicators of Financial Condition. The Statement is not part of generally accepted accounting principles for the public sector, and there is no requirement for government to implement its recommendations.

Our report includes a comparison, where appropriate, to five other provinces. New 3.3 Brunswick, Prince Edward Island, and Newfoundland and Labrador, are compared because they operate in the same regional economic environment; Manitoba and Saskatchewan are compared because of similar population. The information in this chapter’s exhibits has been taken from these jurisdictions’ Public Accounts from 2010 to 2014 for all provinces except Prince Edward Island which has not yet released its Public Accounts for the year ended March 31, 2014.

There are numerous indicators to assess a government’s financial condition. The 3.4 Statement of Recommended Practices recommends that, at a minimum, indicators related to sustainability, flexibility and vulnerability are considered. We have included several of these indicators as well as other information we feel is useful in demonstrating the province’s financial condition. Definitions of sustainability, flexibility and vulnerability follow, as well as a selection of indicators related to each.

3 Indicators of Financial Condition

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Overall Financial Condition

Indicators show that Nova Scotia is in poor financial shape

The following table provides an overview of the province’s financial performance 3.5 for the year ended March 31, 2014, and a summary of the financial indicators included in this chapter. As can be seen, the trend in the majority of indicators is unfavourable.

Type Indicator 1-year Trend 5-year Trend Page #

Financial Performance

Budget-to-actual Variance Unfavourable N/A 32

Actual-to-actual Variance Unfavourable 33

Sustainability

Net Long-term Debt Unfavourable Unfavourable 34

Net Debt Unfavourable Unfavourable 35

Net Debt Per Capita Unfavourable Unfavourable 35

Net Debt as a Percentage of Total Revenues Unfavourable Unfavourable 36

Annual Surplus or Deficit Unfavourable Unfavourable 37

Net Debt as a Percentage of Provincial GDP Unfavourable Stable 39

Flexibility

Debt Servicing Costs as a Percentage of Total

Revenues Stable Stable 40

Vulnerability

Federal Government Transfers as a Percentage of Total Revenues

Unfavourable Favourable 41

Favourable/Unfavourable – theoretical concept due to nature and direction of indicator, not a comment on performance N/A – increase or decrease of this indicator is not considered indicative of either favourable or unfavourable Stable – a change of 1% or less

Financial Performance 2013-14

Budget-to-actual deficit variance of $695 million

Budget-to-actual Variance ($ millions)

Element 2013-14 Estimates 2013-14 Actual Variance

Provincial Source Revenue $6,570 $6,292 ($278)

Federal Source Revenue $3,346 $3,392 $46

Expenses ($10,250) ($10,714) ($464)

Government Business Enterprises (Net Income)

$350 $351 $1

Deficit $16 ($679) ($695)

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Budget-to-actual variance

3.6 – One measure of financial performance is the extent to which government adhered to the fiscal plan detailed in its budget. For the year ended March 31, 2014, the Province of Nova Scotia estimated a surplus of $16 million. The actual result for the year was a deficit of $679 million, an unfavourable variance of $695 million. The table above provides an overview of the variance by significant financial element, after consolidation adjustments, that contributed to the negative result.

Tax revenue was under budget by $313 million

Provincial source revenue decreased by $278 million from the 2013-14 Estimates, 3.7 due mainly to a $313 million downward adjustment to tax revenue estimates.

Actual expenses were $464 million over budget. A significant portion of this is due to a one-time, $318 million increase to the pension valuation adjustment resulting from the change in the governance structure of the Public Service Superannuation Plan at April 1, 2013 which eliminated the province’s obligation for the Plan. These variances were offset by a $46 million increase in federal- source revenue.

Actual-to-actual variance

3.8 – The following table details variances in revenues and departmental expenses to explain the $375 million change in operating results, from a deficit of $304 million in 2012-13 to a deficit of $679 million in 2013-14.

Actual-to-actual Variance ($ millions)

Revenues and Departmental Expenses Revenues Expenses Surplus (Deficit)

2012-13 Deficit $10,104 $10,408 ($304)

Decreased Provincial Tax Revenue ($110)

Increased Federal Revenue $129

Decreased Net Income from GBEs ($3)

Decreased Other Provincial Revenue ($93)

Increased Investment Income $8

Decreased Economic and Rural Development

Expenses ($24)

Increased Education Expenses $19

Increased Health and Wellness Expenses $115

Increased Restructuring Costs $12

Restructuring of NSAC * ($37)

Increased Pension Valuation Adjustment $280

Decreased Debt Servicing Costs ($35)

Decrease – Other ($24)

2013-14 Deficit $10,035 $10,714 ($679)

* Operations of the Nova Scotia Agricultural College (NSAC) were included in the Department of Agriculture to March 31, 2012, at which time they were transferred to Dalhousie University

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$318 million write-off of deferred losses of the Public Service Superannuation Plan increased the deficit

The province’s March 31, 2014 deficit was $679 million. This was an increase 3.9 of $375 million over the prior year deficit of $304 million. The most significant variance related to the pension valuation adjustment which increased $280 million from the previous year. This was due mainly to the $318 million adjustment to fully recognize deferred losses of the Public Service Superannuation Plan, as discussed above, offset by reduced valuation adjustments in other obligations.

Provincial-source revenue also declined by $206 million; this was partially offset by a $129 million increase in federal transfers.

Financial Indicators

Sustainability

Sustainability measures the ability of a government to maintain its existing 3.10

programs and services, including maintaining its financial obligations to creditors, without having to introduce revenue and expenditure adjustments such as increased debt or tax rates. Sustainability indicators provide insight into how a government balances its commitments and debts. The following indicators have been selected to assess sustainability.

Indicators of Debt Position

Net long-term debt

3.11 – Details of the province’s long-term debt are included in Schedule 4 of the March 31, 2014 Public Accounts. Gross long-term debt is

$16 billion which is consistent with the prior year. This includes the debt of all organizations in the government reporting entity. The majority of this debt ($15 billion or 93%) is assumed by core government, i.e. not through government agencies. Gross long-term debt is offset by sinking fund assets of $3.4 billion.

Year Ended March 31

$ Billions

9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Net Long-term Debt ($ billions)

Report of the Auditor Generalto the Nova ScotiaHouse of AssemblyFebruary2015

Independence • Integrity • Impact